If all the recommendations from the Financial System Inquiry (FSI) are adopted, Australia could see it having nine medium-large banks, rather than the big four and a range of smaller banks it currently has.
The winners are Suncorp Group (ASX: SUN), Bendigo & Adelaide Bank (ASX: BEN), Bank of Queensland (ASX BOQ), AMP Limited (ASX: AMP) and Macquarie Group Limited (ASX: MQG).
That would be excellent news for Australian taxpayers and the financial system as a whole, with risks distributed across nine players rather than the majority in the hands of just four banks.
The big four will be required to hold more capital, to bring them into line with internationally active banks, which will likely result in lower returns on equity (ROE), and slower growth. That's not a bad thing. Australian big four banks' (ROE) is already high compared to banks globally. One risk that could arise is the ratings agencies lowering their ratings on the big four banks. Because of their implicit government backing, ratings agencies have tended to increase the big four banks' credit ratings, but with higher capital ratios, it may mean that implicit government support falls away.
Holding more capital also means less chance of the banks going bust. Despite assurances from the likes of the Commonwealth Bank of Australia (ASX: CBA) that it could weather a 30% fall in home prices and high levels of unemployment, the inquiry found that banks would be insolvent if asset prices fell by between 4% and 4.5%. That range by the way, was within the range of shocks experienced overseas during the Global Financial Crisis (GFC).
The specific recommendation to outlaw the ability of self-managed super funds (SMSFs) to borrow to invest in property and the inquiry's mention of negative gearing and capital gains tax as issues, is clearly aimed at reducing the risk of property to Australia's financial system. The inquiry clear thinks that negative gearing has led to speculative investment in property.
Should the government implement measures to reduce the impact of SMSF borrowing and negative gearing, that is likely to see credit growth slow rapidly. With the big four banks controlling more than 80% of the housing market, they will be most affected.
All in all, nine decently-sized banks would be much better for Australia than the current situation. It's clear who the winners and losers are – as long as the recommendations are implemented and not watered down or bypassed altogether.
